Question

Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 10.9 percent and the risk-free rate is 2.8 percent. The company is currently considering a project that will cost $11.46 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.23 million. If the company has a tax rate of 22 percent, what is the net present value of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

Answer 1

Time line		0	1	2	3	4	5	6
Cost of new machine		-11460000
=Initial Investment outlay		-11460000
									100.00%
Profits			3230000	3230000	3230000	3230000	3230000	3230000
-Depreciation	Cost of equipment/no. of years		-1910000	-1910000	-1910000	-1910000	-1910000	-1910000	0	=Salvage Value
=Pretax cash flows			1320000	1320000	1320000	1320000	1320000	1320000
-taxes	=(Pretax cash flows)*(1-tax)		1029600	1029600	1029600	1029600	1029600	1029600
+Depreciation			1910000	1910000	1910000	1910000	1910000	1910000
=after tax operating cash flow			2939600	2939600	2939600	2939600	2939600	2939600
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								0
Total Cash flow for the period		-11460000	2939600	2939600	2939600	2939600	2939600	2939600
Discount factor=	(1+discount rate)^corresponding period	1	1.109	1.229881	1.363938029	1.5126073	1.6774815	1.8603269
Discounted CF=	Cashflow/discount factor	-11460000	2650676.285	2390149.941	2155229.884	1943399.4	1752389	1580152.4
NPV=	Sum of discounted CF=	1011996.77